You’ve identified some companies that you think might be worth investing, you’ve downloaded the SEC fillings and are looking through it, but it makes no sense.

If you’re confused, you’re not alone.

The numerous terms you know nothing about can be frightening to even think about. Have no fear because, using Walmart as an example, we’re going to guide you through understanding a company’s financial statement.

A financial statement can be broken out into 3main parts: income statement, balance sheet and cash flow. We’ll look at what some of the terms mean and which ones you should be looking at more closely than others.

Income Statement

The income statement will give us a snapshot of the company’s financial health, so let’s zero in on revenue, essentially all the money that a company has brought in during a certain period.

On an income statement these periods are usually over a year or a quarter of a year. There are many types of filings that public companies are required to file, but we’re going to focus on the 10Q–a quarterly filings. (Available through the SEC website)

From Wal-Mart’s latest 10Qwe see that in the third quarter of 2016 they made $118 billion. For the year, until Oct 31, 2016, Walmart made $355 billion. We also see the previous year’s numbers and they are in line with 2016 figures. So far so good.

Next, scan down to the expenses to see how those have changed. The idea is to get sense how much money is coming in and how much is going out.

One of the most important things to pay attention to in the income statement is net income. This will give us a sense of how profitable Walmart is. Let’s look at consolidated net income attributable to Walmart.

Sounds like a fancy term but that’s basically your after-tax income minus costs. Take everything you make and subtract all the costs of doing business. Right away, we see something interesting. Walmart is making less money this year than they did in 2015.

What’s going on here? In the first 9 months of 2015, Walmart made $10.1 billion in net income, but in 2016 made $9.9 billion. Furthermore net income in Q3 2016 was $3 billion versus $3.3 billion for Q3 2015. That might not sound like a big difference, but it’s noteworthy when you consider that companies are always trying to beat their previous year targets.

Ok so we need to figure out if this is just a blip or a bigger issue.
We could scour through all the filings at this point but instead we’re going to use a shortcut: Google Finance. Google aggregates all the information from previous filings in one place so it’s very convenient for checking out trends.

It doesn’t look good. Annual data on Wal-Mart shows they made a profit of $16 billion in 2014 but just $14.7 billion the following year. That number fell even further in 2016, to $13.6 billion.

What’s going on with Wal-Mart’s bottom line? To figure that out, let’s look at the balance sheet to see if there are any clues.

Balance Sheet

A company’s balance sheet provides information about assets and liabilities.

Assets are resources with economic value, and can be tangible or intangible.

In Wal-Mart’s case, a tangible asset could be the manufacturing plant they use to make products. An intangible asset could be a patent or a formula.

Wal-Mart’s total assets in 2016 were about $207 billion.

Liabilitiesare anything that a company owes and can be split into “current liabilities”, which are debts payable within one year, and “long-term liabilities” which are debts payable over a longer period. In 2016, Wal-Mart’s total liabilities were $119 billion.

At a glance that’s good. You want your assets to be greater than your liabilities, but looking closer we see that Wal-Mart’s inventorywent up in 2016. Between January and October, Walmart increased their inventory to the tune of $5 billion, while cash and receivables(money owed) went down by about $3 billion.

One reason inventories go up is because you aren’t selling enough of your goods. Instead, it ends up sitting around in your warehouse. The goods are still worth money, and count as assets, but declining sales could very well be the reason profits are down.

With recent initiatives by Wal-Mart to keep their prices down in stores, we seem to be getting warmer.It makes sense that management would cut prices in order to sell off inventory.

Cash Flow Statement

Cash flow refers to the movement of cash into or out of a business. A company wants their cash inflows to exceed their outflows. Having cash ensures that Wal-Mart can pay its outstanding debts and its employees on time.

Cash flows can be broken down into 3 ways.

The first is operational cash flow. This means the cash received or spent as a result of a company’s business activities. Wal-Mart receives cash by selling brooms, for example. They spend cash by paying the cashier who rang up the broom.

The second is investment cash flow. This is cash received or spent through investing activities. This is the purchase and selling of assets: land, plants, patents, etc.

Finally, financing cash flows are cash received through debt or paid out as debt repayments.

The takeaway from looking through the filings is that all three flows have increased. Walmart is investing and borrowing more, and as a result their net cash is less in 2016 than in 2015.

Final thoughts

Walmart is experiencing declining profits due to a slowdown in sales. Revenue is down and Walmart doesn’t have the e-commerce presence that a company like Amazon has, so they really rely on in-store sales.
We could go even further into the filing but let’s leave that to you. Being able to parse through a financial statement is a necessary skill if you want to get into investing.
Let us know what you dig up!